On the making of The Hobbit

July 16th, 2010

Given that successive governments have identified the film industry as a prime catalyst of the knowledge economy, you might have expected more local media attention would be being paid to the sale of MGM, which will directly determine whether and when The Hobbit gets made here, and by whom. Taking the director’s chair on this project has implications for Peter Jackson’s career in the wake of The Lovely Bones (a failure) and King Kong (perceived by some as a failure, even though it wasn’t a commercial flop) while the sudden departure of the originally designated director Guillermo del Toro from the project has added gossip fuel to a story that already had major implications for our skills base and also (locations! locations!) for our tourism industry.

The Hobbit is planned to be a two film project, half financed by MGM, half by Warners. MGM currently faces a residue of $3.7 billion in debts left over from a 2005 buyout, and owed to a group of lenders that include Highland Capital Management and Anchorage Advisers who – for most of this year – have been unable to decide whether it makes more sense for them to sell out to Time Warner who made the highest bid in an auction in March, or soldier on and try to run the studio themselves with re-financing and hired help while rolling over the debt and casting around for a higher bid. MGM has a valuable library of classics and a slate of productions, but how valuable that library actually is remains a moot point, in a world of declining DVD sales. The potential value of that library and the projects in which MGM has a stake were one reason why it rejected as too low the $1.5 billion bid made by Time Warner in March.

Within the sale/re-financing scenario, The Hobbit project is the jewel among several film productions in which MGM holds valuable rights – such as the next James Bond film in the revived franchise under Daniel Craig, and the much-awaited Joss Whedon horror film The Cabin in the Woods. All are in limbo pending resolution of MGM’s situation.

That limbo may not last much longer. The sale of MGM took a fresh turn this week when the Washington Post reported that the Lion’s Gate film and production company were quietly in talks in New York with some of the MGM creditors in order to hammer out a deal. Even if these talks are going well, any subsequent deal would need the OK of the veteran corporate raider Carl Icahn, who is the major shareholder in Lion’s Gate and who is currently embroiled in a separate takeover struggle with its board, as the WaPo article explains:

Any agreement to buy Los Angeles-based MGM, which won another loan reprieve from creditors today, would have to be approved by Carl Icahn, Lions Gate’s largest shareholder. He took a 10-day break from efforts to gain control of Vancouver- based Lions Gate’s board so the company could make a case for certain acquisitions. That standstill agreement expires on July 19.

A few months ago, what MGM was reportedly looking for was a $1 billion infusion, which would include $500 million to finance a slate of eight or nine films. To that end this week, MGM rolled over its debt situation until September 15, creating a window of time to parlay. The same Variety report also has MGM meeting with Spyglass and Summit (of Twilight series fame) executives to try and put together a similar production financing deal, so Lion’s Gate is certainly not the only game in town. In fact, the Wall Street Journal has cited Spyglass as the leading suitor for MGM with Spyglass co-heads Gary Barber and Roger Birnbaum being tipped to run the studio as co-chief executives under the plan being discussed with those stubborn MGM creditors.

Whoever finally prevails, the tidying up of MGM’s ownership, bankruptcy and credit situation has to be concluded by November at the latest if The Hobbit is to meet its preferred production deadline for getting the films into theatres. Since shooting is likely to take a year, the targeted December 2012 release for the first film does look ambitious, and a Christmas 2013 release date has been mooted as being a more realistic goal.

As well as the resolution of the MGM sale/credit situation, the other factor in finally getting The Hobbit greenlit will hinge on how the MGM share of the financing is to be structured. Clearly, this could be via a relatively direct input by a re-financed MGM on the original 50/50 basis with Warners – or it could involve Warners stepping up to assume a bigger share, financed largely by the foreign pre-sales, along much the same lines as happened with LOTR.

On the upside, you would think the opportunity to buy into The Hobbit profit stream was one of the main attractions for Lions Gate – or Spyglass, Summit etc – getting into the market for MGM in the first place, and that the victor would do all it could to get the film greenlit in order to recoup its investment. In the unlikely worst case scenario for The Hobbit, Icahn at Lion’s Gate might be tempted – given his track record as a corporate raider – to break up and sell off the MGM assets and its production slate, piece by piece. Let’s not go there.

All along, a factor in reducing the attractiveness of The Hobbit package has been the number of players – MGM, Warners, the Tolkien estate, Saul Zaentz (who had long ago bought the film rights to Middle Earth from the Tolkien family) Harvey Weinstein ( who still presumably has something like a 5% cut based on his role in the LOTR transition from Universal to New Line) who have claim on a slice of the returns.

There is a question that some of the film rights on The Hobbit actually expired in 2010. Even so, the various shares of that rights pie have to be sorted before you even begin to divvy up the money available for the creatives like Jackson and his colleagues – which would have to include del Toro, who would need to be rewarded for his creative input. Is there also an exit fee for him, covered by his contractual conditions in the event of delays not of his making? Reportedly, some of the recent dealing with respect to The Hobbit has had to do with trying to get the queue of profit participants to reduce their claims. For these and other reasons, Jackson would probably struggle to achieve the same sort of upfront deal ($20 million against 20 % of the grosses) that he got from Universal on King Kong.

In fact, directing The Hobbit could be something of a mixed blessing for Jackson. True, it offers a form of career insurance at a point when The Lovely Bones has bombed and King Kong delivered success, but below the level of some expectations. It also means that less would be riding on his involvement with the upcoming Tintin project. In that respect, having del Toro vacate the director’s chair could be seen as being in Jackson’s interests and the transition has generated a share of ‘did he jump or was he pushed’ speculation online. On the other hand, success on The Hobbit could foster a perception that Jackson is something of a one–trick pony, bound like Frodo to the world of The Ring. Clearly, there is also a fairly major creative dilemma involved in making it. If the world of The Hobbit looks like LOTR, the one-trick pony accusation will gain force. If it doesn’t, many will doubtless attribute this to the input of del Toro. Critically speaking, Jackson could be entering a no-win situation.

A few months ago, when del Toro made his exit, there were probably hopes in the Warners camp that this symptom of the MGM delays would spook the creditors into revisiting the bid that Warners had put on the table in March. The initial perception that this bid was too low had been based on the valuation of the MGM library. Interesting question – at a time when DVD sales have entered what may be a permanent trough, how do you put a realistic figure on the value of such assets in the digital age?

First of all, the answer has much to do with how widely the ownership net is to be cast. Are we talking simply about selling the ancillary rights to the DVD sales of the actual film, or are we talking about the potentially more valuable range of proprietary rights to intellectual property, trademarks, and remakes? Secondly, is the drop in revenue from DVD sales to be regarded as being merely a revenue blip for Hollywood, before the inevitable transition to digital sales and renting rights online?

Maybe. Problem is, that revenue gap right now seems to be as big as the Grand Canyon. According to contributors to Nikki Finke’s site and citing figures from a survey done by Adams Research, Hollywood made almost $17 billion from the DVD business in 2009, a 15% decline from the earnings in 2008. While the digital business is growing, it was worth only a little over $1.5 billion last year. In part, that is a reflection of a reality where DVDs can be sold for anything from $10–20 dollars or more, while online access (true, without so many overheads) typically costs only $4–5 for each unit. Plainly, it is going to take quite a while before the revenue from digital platforms comes even close to the lost returns from declining DVD sales, a golden era that the film industry will probably never manage to recreate. For that reason, as Finke says in the same report, the value of studio libraries continue to be slashed at an alarming rate, from what they were fetching only five years ago. MGM and its creditors may have to settle for less, swallow the losses, and get on with it.

With del Toro gone, a lot of the casting choices being made by him and cited here could well be out the window. Time is of the essence, and Jackson and MGM are not the only considerations in that respect. Sir Ian McKellen isn’t getting any younger and he has some hard work to do in this story. Anyone can buy MGM, and others could conceivably direct The Hobbit – but for most of the potential audience, there can be only one Gandalf.

One Response to “On the making of The Hobbit”

Let’s just hope they get it all worked out sometime in the near future. Because, as you pointed out, there can only be one Gandalf. And he’s already alluded that, if The Hobbit gets delayed much more, he won’t be able to do it. I think the fans already resigned themselves to Jackson not directing the film (even though now it looks as though he will). But no one will be happy if McKellen can’t play Gandalf because of studio deals that the general public barely even understands.